As anyone who has been following the stock market already knows, 2013 was a fantastic year for stocks. In fact, as measured by the S&P 500, the most commonly cited index for the stock market, 2013 was the best year for stocks since 1997. What was the return for 2013? Nearly all news sources will tell you that the S&P 500 increased by 29.6%, and while technically correct, this figure actually understates the true return of the index. Since many of the stocks in the S&P 500 pay dividends, this income, which is not added to the value of the index but paid separately to investors, must be included in the total return analysis. Including dividends, the S&P 500 actually returned 32.3% in 2013. We find it remarkable that most media sources neglect to report the true return of the index – after all, these dividends represent actual cash income paid to investors who hold the index.Should stock investors be feeling good about 2013 stock returns? Absolutely. However, if we take a step back and review stock market returns for the last 14 years (since January 1, 2000), the picture is less optimistic, as shown in the chart below. The first column after the year represents the total return for the S&P 500, including dividends (the percentage figures in parentheses represent negative returns). The next column shows the value of $1,000 invested on 1/1/2000. At the end of the 14 year period ending 2013, an investor would have $1,639. The value at the end of 2012 was $1,239, and if we go down the rows, we can see that the value of $1,000 invested on 1/1/2000 was worth only $909 at the end of 2009. The last column summarizes the annualized return over these same periods. For the 14 years ended 2013, the index returned 3.6% per year. Going down the rows, for the period from 2000 to 2010, for example, the annualized return for stocks was only 0.4% per year.

So what are our key conclusions from this chart?

Stocks have been a terrible investment for the past 14 years. For most of this period, annualized returns have either been negative or less than 2%.

The 2013 gain was significant, but only managed to elevate the annual return since 2000 from an awful 1.7% to a still anemic 3.6% – and for this meager gain, an investor had to endure two market crashes, the most recent of which resulted in a top-to-bottom plunge of over 50%. Compare this to high yield bonds, which returned approximately 7.7% per year since 2000, and at lower risk.

In order to have achieved a minimally respectable stock market return of at least 7% per year, an investor would have had to be invested in stocks for the past 17 years ended 2013.

To get back to a reasonable 7% annual stock market return since January 1, 2000, the S&P 500 will have to increase by 68% in 2014 – or about 30% per year for the next two years, which is improbable. The 16 year return from the start of 2000 through 2015 will thus almost certainly be less than 7%.

The bottom line is that 2013, in our mind, represents the first year of genuine stock market growth for investors, while the period from 2009 to 2012 was simply “digging out” from the massive decline in 2008 (you can see that the value of $1,000 invested was little changed from 2007 to 2012). Yes, if you timed it right, you could have more than doubled your money from the bottom to the top, but this type of market timing has not been shown to work.What should we expect for 2014? Who knows? All predictions are totally worthless and must be ignored. But be aware that the market has now gone 27 months without a correction (defined as at least a 10% decline) when the average streak without a correction is only 18 months. Downtown Investment Advisory’s (DIA) philosophy on investing begins with proper asset allocation which is based on numerous client factors including risk tolerance. While we typically recommend an allocation to stocks in most portfolios with long term horizons (at least 15-20 years), we believe that stocks are riskier than typically portrayed and encourage investors to further explore fixed income investments. For the stock portion of a portfolio, DIA selects among various categories of index funds that fit the specific investment strategy and risk tolerance of each client; we avoid stock picking. While the S&P 500 index is one possible choice, there are actually many other stock indexes to consider to match various strategies, from more aggressive to more income focused.Note that this article was written to provide information and education, and is not intended to be considered investment advice, which can only be provided by DIA following a consultation and execution of an Investment Advisory Contract.

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